Appraisal came back over contract price, what does this mean?

Short Answer:

The property's value is worth more than you are purchasing it for. Therefore, you have more equity in the house. In terms of the mortgage approval, it doesn't change anything. Mortgage lenders use the lower of the contract price or appraised value when calculating loan to value.

Longer Answer:

When you're buying a home with a mortgage, one of the key steps is the appraisal. An appraisal is an unbiased professional opinion of a home's value and is used to ensure that the agreed-upon contract price of the home reflects its true market value. Mortgage lenders want to ensure they aren't lending on a house that will place them underwater. But what happens if the appraisal value is higher than the sales price?

Understanding Appraisal Value vs. Sales Price

Appraisal Value: This is the estimated value of the property as determined by a licensed appraiser. The appraiser considers various factors, including the condition of the home, its location, and any updates to the house, and compares the subject property to recent sales of comparable properties in the area.

Sales/Contract Price: This is the amount that the buyer and seller have agreed upon for the purchase of the home in writing. The price is determined through negotiation and can be influenced by market conditions, the seller's asking price, the number of offers, etc.

What a Higher Appraised Value Means for Buyers

1. Instant Equity: If the appraisal value is higher than the sales price, it means you are essentially getting a good deal. You are purchasing the home for less than its "market value", which gives you instant equity. For example, if the sales price is $250,000 and the appraisal value is $260,000, you have $10,000 in equity right from the start.
2. Negotiation Leverage: You may have some leverage to negotiate further with the seller. How? Increase the sales price to the appraised value and ask the seller to provide additional concessions, such as covering closing costs or making repairs. However, this might backfire, a seller knowing that their house is worth more than the agreed-upon sales price might look for ways to cancel the contract. Proceed with caution on this.

What a Higher Appraised Value Means for Lenders

1. Mortgage Approval: Lenders use the lower of the appraised value or contract price to determine the loan-to-value (LTV) ratio. A higher appraisal value does not affect mortgage approval for purchases.

1. Reduced Risk: For lenders, a higher appraisal value reduces the risk associated with the loan. It means the property is worth more than the loan amount, providing a cushion in case of default.

Conclusion

A higher appraisal value than the sales price/contract is generally a positive outcome for all parties involved. Buyers gain instant equity. However, lenders will use the lower of the sales/contract price or the appraised value, when calculating LTV. Therefore, a higher appraised value does not change the overall makeup of the mortgage.

If you find yourself in this fortunate position, congratulations!

Have additional questions about appraisals, I am happy to answer them. Reach out to me at teamjd@mainstreethl.com

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This blog is for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact me.